by Miguel Granier
My career in impact investing began in 2008, when I was fortunate enough to be asked to start an impact investment fund for a large family office. At the time, the term impact investing was less than a year old1, and there was no consensus on what it meant. But that didn’t slow us down.
In 2008, impact investing predecessors, like social enterprise and social entrepreneurship were already well-established concepts, but almost entirely focused on not-for-profit enterprises. Even the impact investment forerunners like Acumen were donor-supported models seeking concessionary returns. It was clearly the beginning of something, but we lacked the vocabulary, metrics, and standards to get consensus on what that something was.
Microfinance was impact investing’s established for-profit predecessor and many of us early practitioners (and nearly all the investors) cut our teeth on portfolios of tiny loans for borrowers with little or no assets. Microfinance institutions (MFIs) and investors had turned to for-profit, scalable models in the 1990’s, after 20 years of experimentation. Though it was a significant shift, they benefited from the years of experimentation that helped establish strong historical performance data and proven business models. They also had powerful global networks (ACCION, Grameen, Women’s World Banking, Finca, etc) creating standards, transparency, and accountability. For impact investing, things were evolving much more quickly. The Global Impact Investing Network (GIIN), which is working on establishing those same standards for impact investing, didn’t formally exist in 2008.
What the success of microfinance did for impact investing was create an awareness of an opportunity. Books like C.K. Prahalad’s Fortune’s at the Bottom of the Pyramid and Muhammad Yunus’ Banker to the Poor proved that a massive underserved segment of the global population could participate in market economics. Then a seminal report from the World Resource Institute powerfully entitled “The Next 4 Billion”2 showed us all just how big that segment was. It was clear that an opportunity for scaling significant businesses focused on the providing beneficial products and services to the Base of the Pyramid (BOP)3 existed. Yet for impact investing to really take off, we needed to prove that commercial success was possible as well.
It’s not an accident that impact investing was formally established the same year (2007) that Compartamos (a Mexican MFI) raised nearly $500 million dollars in an Initial Public Offering (IPO). For impact investing to really succeed, there had to be proof that investors backing innovative social entrepreneurs could “exit”, or sell our shares to another investor or a company. More importantly, we needed proof that we could sell those shares at a significant gain to compensate for the risk and longer timeframe of the investment period. When Compartamos IPO’d, ACCION, an early investor, earned a reported $134 million4 (and an IRR of more than 100%). Though the IPO is still a controversial event, it was the rocket-fuel the emerging industry of impact investing was looking for.
After the Compartamos IPO, the excitement for equity investments grew rapidly. Impact investors looked to technology and quickly began imitating the Silicon Valley venture capital model. Looking back now, it seems incredible how quickly the field developed. Many of us were tossed into Investment Manager roles even though we didn’t know what an IRR5 was, much less the target IRR for a new fund. More importantly, investment funds require robust investment pipelines to diversify risk across larger portfolios of investments. Yet in early 2008, the Global Social Venture Competition was one of the few business plan competitions focused on social entrepreneurship, SOCAP6 hadn’t launched, and Village Capital7 was still just an idea waiting for a founder.
To emphasize the breakneck pace at which this industry was developing, by the end of 2009 (only a year after starting at the original family office), I had started my own company called Invested Development. It took me two years to close our first $10 million fund, but we have managed to double our capital every two years since then. Today we have $40 million in committed capital, and an active investment portfolio of eighteen companies across eight countries and three continents.
Despite the continued growth and energy around Impact Investing, today what excites me most is watching the field professionalize. From dedicated university programs like the Social Enterprise Institute at Northeastern, to the large commitments from established financial sector firms like Bain Capital8, Goldman Sachs9, and Blackrock10, impact investing is quickly becoming more than a niche for do-gooder investors. Now, a new generation of investment managers and social entrepreneurs is being trained to make sure the trend continues. As a new lecturer at Northeastern, it is my great privilege to have the opportunity to share my experiences, and possibly influence the future leaders of this growing field. I can’t wait to get started!
[1] The phase was coined at a Rockefeller Foundation convening organized by Antony Bugg-Levine in 2007.
[2] The Next 4 Billion Market Size and Business Strategy at the Base of the Pyramid, Allen Hammond, William J Kramer, Julia Tran, Rob Katz and Courtland Walker – March 2007 (http://www.wri.org/publication/next-4-billion)
[3] The term Base of Pyramid (BOP) was coined by C.K. Prahalad and refers to those living on less than $5 a day (adjusted for purchasing power parity). Today BOP is well established socioeconomic terminology and is even highly segmented. l
[4] Microfinance’s Success Sets Off a Debate in Mexico, Elisabeth Malkin, New York Times, April 5, 2008
[5] Internal Rate of Return is the discount rate required to make the Net Present Value of an investment zero. An easier way to think about it is the return on an investment that takes into account the timeframe of that investment. It’s expressed as a % so it can be easily compared between investments of different sizes and durations.
[6] SOCAP is an annual conference dedicated showcasing the best social capital markets have to offer. Today, Impact Investing and social entrepreneurship dominate the agenda.
[7] Village Capital is a global social entrepreneur accelerator and fund.
[8]http://www.baincapital.com/newsroom/former-massachusetts-governor-deval-l-patrick-joins-bain-capital-launch-new-business (accessed on 12.01.2015)
[9] http://www.goldmansachs.com/our-thinking/pages/social-impact-bonds.html (accessed 12.01.2015)
[10] http://www.blackrockimpact.com/ (accessed 12.01.2015)
